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The Cost of Heterogeneity in a Monetary Union

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Author Info
Andrew Hughes Hallett () (Department of Economics, Vanderbilt University and University of Strathclyde, UK)
Diana N. Weymark () (Department of Economics, Vanderbilt Unviersity)

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Abstract

In this paper, we explore whether heterogeneity among union members could threaten the stability of the EMU. The types of heterogeneity we consider are (1) asymmetries in the transmission of monetary and fiscal policies, and (2) differences in national preferences for price stability, output growth, and income redistribution. Our results show that the costs of membership are cumulative and can be significant for countries whose structure and/or preferences deviate from those underlying the common monetary policy. In part, these costs arise because monetary policy imposed by an independent central bank automatically constrains the use of fiscal policy by national governments.

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Publisher Info
Paper provided by Department of Economics, Vanderbilt University in its series Working Papers with number 0128.

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Date of creation: Dec 2001
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Handle: RePEc:van:wpaper:0128

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Related research
Keywords: Central bank independence; currency union; EMU; monetary union; preference assymmetries; transmission asymmetries;

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Find related papers by JEL classification:
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Sibert, Anne & Sutherland, Alan, 1997. "Monetary Regimes and Labour Market Reform," CEPR Discussion Papers 1731, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  2. Agell, Jonas, 1999. "On the Benefits from Rigid Labour Markets: Norms, Market Failures, and Social Insurance," Economic Journal, Royal Economic Society, vol. 109(453), pages F143-64, February. [Downloadable!] (restricted)
  3. Demertzis, Maria & Hughes Hallett, Andrew & Viegi, Nicola, 2004. "An independent central bank faced with elected governments," European Journal of Political Economy, Elsevier, vol. 20(4), pages 907-922, November. [Downloadable!] (restricted)
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  4. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November. [Downloadable!] (restricted)
  5. Calmfors, Lars, 1998. "Macroeconomic Policy, Wage Setting, and Employment--What Difference Does the EMU Make?," Oxford Review of Economic Policy, Oxford University Press, vol. 14(3), pages 125-51, Autumn.
  6. Ramana Ramaswamy & Torsten Slok, 1998. "The Real Effects of Monetary Policy in the European Union: What Are the Differences?," IMF Staff Papers, Palgrave Macmillan Journals, vol. 45(2), pages 6. [Downloadable!] (restricted)
    Other versions:
  7. Stephen G. Cecchetti, 1999. "Legal structure, financial structure, and the monetary policy transmission mechanism," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 9-28. [Downloadable!]
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  8. Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 63(3), pages 326-34, June.
  9. Giavazzi, Francesco & Pagano, Marco, 1986. "The Advantages of Tying One's Hands: EMS Discipline and Central Bank Credibility," CEPR Discussion Papers 135, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  10. Kieler, M. & Saarenheimo, T., 1998. "Differences in Monetary Policy Transmission? A Case Not Closed," European Economy - Economic Papers 132, Commission of the EC, Directorate-General for Economic and Financial Affairs (DG ECFIN).
  11. Alan B. Krueger, 2000. "From Bismarck to Maastricht: The March to European Union and the Labor Compact," NBER Working Papers 7456, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. Dave Turner & Elena Seghezza, 1999. "Testing for a Common OECD Phillips Curve," OECD Economics Department Working Papers 219, OECD, Economics Department. [Downloadable!]
  13. Andrew Brigden & Charles Nolan, . "Monetary stabilisation policy in a monetary union: some simple analytics," Bank of England working papers 102, Bank of England. [Downloadable!]
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  14. De Grauwe, Paul, 1995. "Alternative strategies towards monetary union," European Economic Review, Elsevier, vol. 39(3-4), pages 483-491, April. [Downloadable!] (restricted)
  15. Calmfors, Lars, 1998. "Macroeconomic Policy, Wage Setting and Employment - What Difference Does the EMU Make?," Seminar Papers 657, Stockholm University, Institute for International Economic Studies. [Downloadable!]
  16. Svensson, Lars E O, 1997. "Optimal Inflation Targets, "Conservative" Central Banks, and Linear Inflation Contracts," American Economic Review, American Economic Association, vol. 87(1), pages 98-114, March. [Downloadable!] (restricted)
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  17. Dixit, Avinash, 2001. "Games of monetary and fiscal interactions in the EMU," European Economic Review, Elsevier, vol. 45(4-6), pages 589-613, May. [Downloadable!] (restricted)
  18. Calmfors, Lars, 2001. "Unemployment, Labor Market Reform, and Monetary Union," Journal of Labor Economics, University of Chicago Press, vol. 19(2), pages 265-89, April. [Downloadable!] (restricted)
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  20. Calmfors, L., 1998. "Macroeconomic Policy, Wage Setting and Employment -What Differences Does the EMU Make?," Papers 657, Stockholm - International Economic Studies.
  21. Gilles Oudiz & Jeffrey Sachs, 1984. "Macroeconomic Policy Coordination among the Industrial Economies," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 15(1984-1), pages 1-76. [Downloadable!]
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Berk, J.M & Swank, J., 2002. "Regional price adjustment in a monetary union: the case of EMU," Serie Research Memoranda 0016, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics. [Downloadable!]
    Other versions:
  2. Diana N. Weymark, 2005. "Inflation, Government Transfers, and Optimal Central Bank Independence," Working Papers 0502, Department of Economics, Vanderbilt University. [Downloadable!]
  3. Andrew Hughes Hallett & Diana N. Weymark, 2002. "Policy Games and the Optimal Design of Central Banks," Working Papers 0220, Department of Economics, Vanderbilt University. [Downloadable!]
  4. Jan Marc Berk & Job Swank, 2002. "Regional Price Adjustment in a Monetary Union," Tinbergen Institute Discussion Papers 02-077/2, Tinbergen Institute. [Downloadable!]
  5. Andrew Hughes Hallett & Diana N. Weymark, 2003. "Independent Monetary Policies and Social Equality," Working Papers 0307, Department of Economics, Vanderbilt University. [Downloadable!]
    Other versions:
  6. Alexandra Ferreira Lopes, 2007. "The Costs of EMU for Transition Countries," Money Macro and Finance (MMF) Research Group Conference 2006 2, Money Macro and Finance Research Group. [Downloadable!]
    Other versions:
  7. Diana N. Weymark, 2000. "Inflation, Income Redistribution, and Optimal Central Bank Independence," Working Papers 0102, Department of Economics, Vanderbilt University, revised Mar 2002. [Downloadable!]
  8. Hughes Hallett, Andrew & Weymark, Diana, 2002. "Government Leadership and Central Bank Design," CEPR Discussion Papers 3395, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  9. Andre, Nyembwe, 2003. "Monetary Policy, Credibility and Asymmetries : Small African Countries and the EMU Advent," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2003011, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES), revised 06 Aug 2002. [Downloadable!]
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